In response to frequent requests from clients and acquaintances over the past few months, I've written a series of bite-sized blogs that look at the 5 steps to starting your own business.

You will find Step 1: Developing your concept and proposition, Step 2: Understanding your Opportunity, and Step 3: Developing your Business Plan already available on the Business West website.

The next step in your ‘going it alone’ journey is inevitably going to be thinking about how you will fund your business as you start up and grow.

Step 4: Funding and Finance options

One thing’s for sure when you are starting up your business. You will be amazed at all of the extra costs that you incur that you hadn’t even thought about. Setting up the company, developing your website, travelling to networking and client meetings (especially if you go by train like me!), and even an increase in your own heat and lighting costs at home if you are, as most entrepreneurs do, starting up from your kitchen table.

Keeping a careful log of all expenses is vital as it will help you to reclaim VAT each quarter, whether you have registered for it at the outset or do so later on. You will quickly appreciate why your Finance Director was such a stickler for accurate and complete Expenses forms each month!

However, rather than the default of relying on your own personal finances to support the business and the investment you will need to make on IT (e.g. your own laptop and printer), and where appropriate R&D costs, there are other routes available to raise your seed capital, and each have their pros and cons. Just to be clear, I don’t claim to be an expert in finance or tax, and would always suggest that you take professional advice. The purpose of this blog is just to make you aware of the different options you might have available. They are often dependent on the stage that your business is at, and the amount and reason for the money required being clear, so make sure you do your own research before opting for a particular route.

There are 4 main options for finance available to start ups and early stage business owners:

Debt Finance

Equity investment

Grants

Personal Funds

Let’s take a brief look at each of these in turn.

1. Debt Finance

In its simplest form this generally is funding obtained from a bank in the form of a loan that is repayable over an agreed term, with an agreed interest rate. The benefit of this type of financing is that you know what is to be repaid each month, and that this has been incorporated into your Business Plan. In addition you should have the confidence that your Business Plan will have been reviewed by a knowledgeable person with an eye on the risks associated with your venture, although don’t rely on this having been an exhaustive process these days. The cons are obviously around the need to continue to cover the payments even if you find that your business is slower in getting started, or that you are hit by some unexpected event that impacts your ability to deliver the revenue levels you had anticipated. The bank will have the power to fore-close if they believe that their investment is at risk, so you need to keep them informed on how you are doing against the plan and let them know ahead of time if you foresee any issues that might cause you to adjust your plans. Banks don’t like surprises!

The other issue with bank loans is that with the increase in online banking the chances are that you won’t really get to develop the close relationship that you once had with the branch bank manager years ago. When choosing your business bank find out how they manage and support you, and whether you will have a personal manager assigned to you for continuity and consistency in understanding your specific business needs.

If you don’t need a lot of money and/or can reasonably expect with some confidence that you will not require additional funding over a longer period, I would suggest that you check out the credit card route. Some very successful businesses have been started using credit cards, and if you get one with a 0% term for all new purchases, you may be able to clear the ‘loan’ down before you start paying interest. I do stress though that this is for only low levels of finance. You can be saddled with very high debts if it starts to rack up interest, which would be worse than a bank loan.

2. Equity investment

The range of investors available to start ups and early stage companies is large, and each have their own benefits as well as challenges. Angel investors often work alone and will be putting their own money into a venture to buy a shareholding, with the hope of making a reasonable return when the business starts to grow. There are numerous events around the country that offer entrepreneurs the chance to present their business idea to ‘Angels’, rather like speed dating for business, the purpose of which is to grab their attention and set up a more detailed discussion at a later date. They tend to leave you to run the business, but can have helpful contacts to accelerate your growth through distribution access. You will need to agree the frequency and formality of updates to them though so that they don’t become detached or concerned about the progress being made.

Crowd funding sites, such as Seedrs, have mushroomed over the past 10 years, and have benefited from refinements to their service and the quality of the investors they attract. Businesses can look for investment for relatively small amounts through to a £million + and I have noticed that a high proportion of those that achieve or over-achieve their fundraising target tend to be sustainable, natural brands with a strong environmental ethos, and often a consumer product rather than a service. Consumer product brands can do particularly well when they offer ‘free stuff’ as part of their investor motivation. This has the dual benefit of not only raising the required funds but also encouraging a broad base of brand enthusiasts who have some self-interest in promoting your products. However, you will have a large body of investors who are individuals perhaps investing for the first time, and for whom a small investment is a very big deal. They can be very time-consuming but they are the most engaged of all investors that I have met.

The final option, although not often for start ups unless in the tech sector, is the Private Equity or even Venture Capitalist route. This is a different game for you as a business owner, and they will have an eye on the potential exit within a few years which might require you to operate in a way that is not aligned with your original Mission. Their focus is on maximising their return for their funds or management companies, and the benefit to you is that if you can work together well for a few years you will exit with a pot of money to go and start your next venture. I would approach this option with caution and make sure that you can work closely with the investors, have agreed decision making powers and voting rights captured in the investment agreement, and accept that you are not in sole charge of ‘your baby’ any longer.

In each of the cases above, equity investment will require a very detailed Business Plan that will be pulled apart and stress tested to various degrees which will require a lot of your time and effort and could prove to be a real distraction at the very point that you need to be 100% diving your business. You also need to find out about how your business can qualify for SEIS and EIS relief for your investors, which is a form of tax relief provided by HMRC in the event of their investment being lost should the business fail. Ask your accountant or check out www.gov.uk

3. Grants

One of the most over-looked or under-valued sources of finance is government grants. We often assume that with all talk of austerity that there is no money available but actually there were (in England) over 200 grants available last year. Some of these are supporting national campaigns such as the drive for export market development and research and development especially in the tech and medical sectors, whilst others will be sponsored by regional development groups who have a particular interest in encouraging local employment.

These grants can provide money for equipment such as IT and marketing (not repayable), and in other cases will be on a matched funding basis, effectively doubling your own investment funds available. There are conditions attached, and often the total amount available is finite so you need to apply early in order to have your application assessed in good time. Take a look at www.gov.uk/businessfinancesupport for a list of local regional and national grants that you could apply for. Just be aware, for regional grants you need to have your main business site located in their carefully defined areas, or you will be disqualified!

Grants and government support can also pay for (or subsidise) advice provided by external consultants. The Growth Hub and GAINS group in Gloucestershire is an excellent example of this, as is Business West, so take some time to find out how you could be helped in your business. You don’t have to be at start up stage, with some grants being available for those businesses entering into accelerated growth phases. Your chosen consultant may have to be registered and approved by the local group to manage quality and costs, so check first, and be prepared to self fund if you feel your preferred (unregistered) advisor has greater experience or a better working relationship with you. Personal chemistry is vital to success in any consultant-client working.

4. Personal Funding

This is the most used option for start up business owners. Raiding the savings or investing an inheritance/windfall/redundancy pay off to get going is common, and providing you have sufficient to survive on for personal costs as well as business costs this can be the best route. Family and friends might pitch in with loans that may or may not need repaying and often are interest free, without you having to sacrifice equity or control in your business.

Knowing when to call it a day however can be difficult. I have met various start up owners who have ‘over-invested’ ploughing all of their money into their business and don’t feel able to walk away, even when the writing is on the wall in big letters that it isn’t going to work, for whatever reason. You will need to maintain a sensible and objective view of your investment, know when you need to have hit certain milestones for you to not jeopardise your home, and have a Plan B in mind should that unfortunate event happen. Remember over half of all start ups will fail in year 1.

Your choice of funding will come down to how much money you need and how much control/ownership of your business you are prepared to give up in order to have it. Having the chance to talk through these options with an objective advisor, as well as having a sounding board for new ideas and opportunities is essential, so I would always recommend that you have access to impartial and informed advice before you make your final decisions, as well as developing a mentoring relationship with someone you can trust on and on-going basis.

Chambers

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